Qantas considers domestic-international split

By Jamie Freed and Sarah Thompson

July 23, 2014 — 3.00am

Qantas is considering a split of its domestic and international arms to attract more foreign investment as part of its wide-ranging structural review.

Less than a week after the Senate passed changes to the Qantas Sale Act in a compromise deal, sources said the airline was studying whether it should pursue a similar structure to that of rival Virgin Australia.

It is also considering options such as a part sale of its frequent flyer business or Jetstar as part of the review.Credit:Jim Rice

Qantas is due to provide an update on its structural review alongside its full-year results next month. It is also considering options such as a part sale of its frequent flyer business or Jetstar as part of the review.

Analysts said a split of the domestic and international arms, to allow greater foreign investment in Qantas' domestic business, would be a positive for the ailing carrier.

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''That would take some work but we don't think it would be impossible to achieve,'' Deutsche Bank analyst Cameron McDonald said. ''I do think that [Qantas] obviously are keen to have a seat at [the global airline consolidation] table if and when it becomes appropriate.''

Virgin split the ownership of its domestic and international business in 2012 through an in-specie distribution of shares in its international division to its holders at the time.

Virgin's international division is an unlisted entity with a separate Australian-controlled board and ownership structure from the

domestic division. Air New Zealand, Singapore Airlines, Etihad Airways and Sir Richard Branson own nearly 80 per cent of Virgin shares, but the international division is majority Australian-owned to comply with the Air Navigation Act.

Splitting Qantas' domestic and international arms would allow much larger investment by a foreign carrier than is achievable easily in practice even after the Qantas Sale Act changes passed on Friday.

The revisions agreed in a compromise with Labor allow a single foreign airline or investor to hold up to 49 per cent of Qantas, versus prior restrictions that barred a foreign investor from owning more than 25 per cent or group of foreign airlines from owning more than 35 per cent.

However, Qantas must remain 51 per cent Australian-owned to maintain its international traffic rights under the Air Navigation Act. It is already about 38 per cent foreign-owned even though there are no airlines on the register.

That means no foreign carrier could buy more than 11 per cent unless it bought the stock from other foreign shareholders or was issued shares in an equity placement, unless Qantas split its domestic and international arms. Its ability to do so under the latest version of the Qantas Sale Act is unclear, as some references are to ''Qantas'' rather than ''Qantas International'' even though most of the restrictions are of the same type that apply only to Virgin's international arm under the Air Navigation Act.

But Transport Minister Warren Truss in February highlighted the potential for a Qantas split, meaning the government is unlikely to oppose such a move.

In March, Qantas chief executive Alan Joyce told a Senate inquiry that talk of any such move was ''hypothetical''. ''We have not got any plans,'' he said at the time.

Qantas in February froze work on a costly plan to split the air operators' certificates, or licences to fly, for its domestic and international division and reintegrated some of the operating management structures for the businesses. However, Mr Joyce has said the split, if revived, could be done in six to nine months. Qantas' domestic and international businesses already report financial results separately.

Qantas is expected to report a full-year pre-tax loss of $747 million, but there is speculation that one-off costs and write-downs could lead to a net loss of more than $1 billion.

CAPA Centre for Aviation executive director Peter Harbison said Qantas should follow Virgin's lead and split its operations, but he did not know if it would.

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His aviation consultancy on Tuesday published a detailed report that suggested Qantas would not be able to mimic the Virgin structure without significant opposition.

Potential suitors Emirates and China Southern denied any interest in buying an equity stake in Qantas.